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Portfolio

Eni addresses its Norwegian value at risk

Eni Norge and Point Resources to merge into independent Norwegian E&P
Eni and private equity investor HitecVision announced today that Eni Norge and Point Resources are merging to form Vår Energi AS (Eni 69.6%, HitecVision 30.4%). The combined company will have a portfolio of 17 producing oil and gas fields with current output of 180kboe/d, expected to rise to 250kboe/d by 2023. The incremental production will come from the development of ten existing assets with recoverable resources of 500mboe. Capex over the next five years (for new developments, redevelopment of existing fields, and exploration) is estimated by the company at NKr65bn ($8bn).

Deal metrics look attractive
The announced transaction appears to be ultimately accretive on most metrics – both financial and operational. With more production to come on from Point Resources in the medium term the initial production effect (we estimate 2018 Eni Norwegian production at ~135-140kboed but Eni expects Point at ~34kboed) will likely see a small dilution but the net to Eni in 2023 is ~175kboed vs an Eni stand-alone of ~140kboed (somewhat depending on start-up of Castberg). The combination is material (3P resources of ~1.3bn boe, mostly oil) and efficient (break-even price of <$30/bbl).

Elegantly addresses a key Eni issue with a proven governance model
Eni has enjoyed considerable exploration success in Norway but has been hurt by operational hiccups. This combination should have the benefit of creating a new, Norwegian governance structure. It creates greater critical mass which likely allows it to take up further opportunities in a fiscally and operationally efficient fashion. It consolidates and deepens Eni's exposure to a key OECD province. The obvious comparison is Aker-BP which has been a notable success albeit there is no discussion of a minority listing at present.

Valuation: Buy, €18.50 price target
We set our price target using a 2019E ($70/bbl normalised) EV/DACF of 5.1x, a 14% premium to the three-year average.

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An upgrade to U.S. equities

BlackRock has upgraded its tactical view of U.S. equities to overweight from neutral. The reason: Impending fiscal stimulus is supercharging U.S. earnings growth expectations.

We have shifted our view on European equities to neutral as a result. Earnings momentum is solid in Europe — but lags that of other regions.


blackrock an upgrade to u s equities
Our U.S. upgrade boils down to a fundamental story underpinned by earnings growth.
An added bonus: U.S. valuations look slightly more attractive after the February stock market sw oon. Economic strength w as already changing the tone of earnings momentum, but U.S. tax cuts and government spending plans lit a fire under the trend. The chart above illustrates the sharp acceleration in U.S. earnings upgrades as analysts factored in the stimulus. The ratio of upgrades to downgrades for U.S. large caps (the orange line) stands at the highest level since the data series started in 1988. Upw ard revisions are solid globally, but the U.S. strength is unmatched. Japan is unique, as earnings revisions there tend to be noisy. We see the strong U.S. earnings momentum persisting in the short term and leading to higher returns.

Earnings growth eclipses valuations

U.S. earnings grow th momentum was already strong before the announced tax cuts and fiscal stimulus, thanks to an improving economy. Earnings grow th for S&P 500 firms w as 15% year-over-year in the last quarter of 2017, and sales grow th w as the highest since the third quarter of 2011. Some 60% of the S&P 500 companies providing guidance during fourth quarter earnings season exceeded w hat analysts had penciled in for 2018. Companies have had an incentive to give conservative forecasts as stocks that disappointed on earnings and sales have been disproportionately punished in recent quarters. U.S. earnings estimates have jumped by more than seven percentage points to 19% grow th for 2018, as analysts factored in corporate guidance and the stimulus benefits.

U.S. stocks have already retraced a large part of their early February losses, but w e believe the coming positive effects of new U.S. tax and spending plans are still underappreciated by markets. Valuations are certainly still at the top end of their historical range and we see little scope for equity multiples in the U.S., or most other regions, to expand further. But we find earnings growth matters more than valuations over shorter time horizons at this stage of the bull market. We are in the ninth year of an unusually long economic expansion, and w hile w e believe the cycle has room to run, w e see gradually rising rates and modestly higher inflation ahead.

We see earnings-per-share (EPS) grow th and dividends fueling returns. Some companies w ill choose to spend their tax w indfalls on buybacks or dividends; others w ill boost capital spending. The scope for additional M&A activity is also large. The risks? Accelerating inflationary pressures could threaten margins and rising real rates may lead to low er multiples. We see the tax w indfall providing an earnings buffer against these forces. We maintain high conviction in equities overall. We see solid European equity returns ahead, but low er earnings grow th relative to other regions limits European stocks’ potential to outperform in the short term. Emerging markets remain a favored region. In the U.S., w e like the momentum and value factors, financials and technology firms.

Richard Turnill - Global Chief Investment Strategist - BlackRock

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